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Integrys Energy Group, Inc. (NYSE:TEG)

Q3 2010 Earnings Call

November 4, 2010 9:00 am ET

Executives

Charles Schrock – Chairman, President, Chief Executive Officer

Joseph O’Leary – Senior Vice President, Chief Financial Officer

Steven Eschbach – Vice President, Investor Relations

Mark Radtke – Chief Executive Officer, Integrys Energy Services

James Schott – Vice President, External Affairs

Analysts

Paul Patterson – Glenrock Associates

Ali Agha – SunTrust Robinson Humphrey

Chris Shelton – Millennium Partners

Faisal Khan – Citigroup

Ashar Khan – Visium Asset Management

Operator

Welcome to the third quarter 2010 earnings conference call for Integrys Energy Group Incorporated. All lines will remain in listen-only until the question and answer session. At that time, instructions will be given should you wish to participate. At the request of Integrys Energy Group, today’s call will be recorded for instant replay.

I would now like to introduce today’s host, Mr. Steve Eschbach, Vice President of Investor Relations at Integrys Energy Group. Sir, you may now begin.

Steven Eschbach

Thank you very much and good morning everyone. Welcome to Integrys Energy Group’s Third Quarter 2010 Earnings conference call. Delivering formal remarks with me today are Charlie Schrock, our Chairman, President, and Chief Executive Officer; and Joe O’Leary, our Senior Vice President and Chief Financial Officer. Mark Radtke, Chief Executive Officer of our non-regulated subsidiary, Integrys Energy Services; and Jim Schott, our Vice President, External Affairs are also available for the question and answer session at the conclusion of our formal remarks. Larry Borgard, our President and Chief Operating Officer of the utility group, is unavailable for today’s call.

The slides supporting today’s presentation and an associated data package are located on our website at www.integrysgroup.com. Select Investor, select Presentation, and then today’s presentation.

Before we begin, I will advise everyone that this call is being recorded and will be available for replay through February 22, 2011.

I need to direct you to Slide 3 and 4 of our presentation and point out that this presentation contains forward-looking statements within the definition of the Securities and Exchange Commission’s Safe Harbor rules including projected results for Integrys Energy Group and its subsidiaries. Forward-looking statements contain factors that are beyond the ability of Integrys Energy Group to control, and in many cases Integrys Energy Group cannot predict what factors would cause actual results to differ materially from those indicated by forward-looking statements. I also refer you to the forward-looking statement section of yesterday’s news release for further information. Except as may be required by federal securities laws, Integrys Energy Group and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statement contained in this presentation whether the result of new information, future events, or otherwise.

Slide 5 indicates that today’s presentation includes non-GAAP financial information related to diluted earnings per share adjusted and adjusted earnings or loss. We believe that these are useful measures for providing investors with additional insight into our operating performance and the efforts of certain items that are not comparable from one period to the next. Please review the text of this slide regarding non-GAAP financial information.

I will now turn this call over to Charlie Schrock. Charlie?

Charles Schrock

Thanks, Steve. Good morning everyone and thanks for joining us on the call today. I will begin by providing an overview of our third quarter from a financial standpoint as well as a brief overview of our operating results. Joe O’Leary will then discuss our financials for the third quarter of 2010 in more detail and our guidance for 2010 and 2011 diluted earnings per share adjusted. We will conclude with a question and answer session.

Moving to Slide 6, we are emphasizing reported earnings on an adjusted basis as we did last quarter. As a reminder, earnings per share adjusted excludes the effect of certain items that are not comparable from one period to the next and is how we evaluate our financial performance.

So with that explanation, we reported diluted earnings per share adjusted of $0.35 for the third quarter of 2010 versus $0.29 in the same quarter a year ago. This quarter-over-quarter increase was primarily driven by increased sales at our regulated electric utility segment mainly due to warmer weather than in 2009. As a reminder to what we released a week ago, our guidance range for 2010 diluted earnings per share adjusted is between $3.00 and $3.17; and as indicated in the news release that we issued last evening, we are reaffirming our guidance range for 2011 diluted earnings per share adjusted of between $3.24 and $3.57.

Please move to Slide 7 as I provide a brief operational overview of our regulated utilities and non-regulated retail energy supply and services subsidiary. The performance of our regulated utilities was in line with our expectations. In fact, for the regulated electric utility segment, the third quarter was strong as a result of the hottest summer since 1995 in Wisconsin and the upper peninsula of Michigan. The addition of Weston 4 in 2008 in our efforts to adjust the operation of our generating plants to optimize their performance within the Midwest Independent System Operator energy market has resulted in benefits for both customers and shareholders.

With weather much warmer than in 2009, electric consumption was up significantly, including residential consumption which was 15.2% over the same quarter of last year. Even with higher demand, we were able to supply our customers with lower cost internally generated electricity as well as sell excess generation into the marketplace through opportunity sales. Customers and shareholders in turn benefited as well because of our current position in the Wisconsin fuel window.

For the regulated natural gas segment, third quarter is traditionally our lowest quarter. Additional detail is disclosed in our news release. The performance of this segment was as expected.

From an economic standpoint, we saw signs that things are stabilizing with a slight improvement in our electric utilities service areas. We have provided some additional economic data related to our service territories on Slide 22 in the Appendix.

On the regulatory front, our rate cases at Wisconsin Public Service and Upper Peninsula Power are progressing according to schedule. Details on each of these proceedings can be found in the Appendix on Slides 24 and 25.

The decoupling mechanism for Michigan gas utilities was approved by the Michigan Public Service Commission effective retroactive to January 1, 2010. For our Michigan gas utilities, this mechanism relates only to customer usage and not to weather.

Also in the works are plans to file a retail natural gas rate case for Minnesota Energy Resources with the Minnesota Public Utilities Commission by the end of November. Details will be available on our website once filed. We expect to have more to share with you regarding this rate case during our fourth quarter conference call in February of next year.

With respect to our non-regulated retail energy supply and services subsidiary, our restructuring plan remains on track to be completed by year-end. The retained businesses are showing quarter-over-quarter unit margin improvement. Our investment plans related to assets with renewal attributes are also on track with our recently announced solar joint venture with Duke Energy Generation Services as an integral part of our go-forward plan. We are excited about this joint venture as we believe it will provide increased opportunities for quality solar photovoltaic projects. Additional details regarding this joint venture are provided in the Appendix on Slides 38 and 39.

Moving onto Slide 8, we are making good progress on the implementation of our strategy for retail natural gas and retail power business operations at Integrys Energy Services. The volumes at September 30, 2010 that are contracted for delivery in 2010 and 2011 related to the natural gas and retail electric businesses show improvement versus what we reported to you in August for contracted volumes at June 30, 2010.

Expanding a bit more on our operational results through the third quarter of 2010, Slide 9 depicts the progress we are making during this transitional year. For the quarter, the financial results for our retained businesses are up versus the comparable period a year ago. Our volumes for retail natural gas are on target but the projected 2010 and 2011 retail electric volumes are falling short of the expectations we set in February of this year. However, our unit margins for power are ahead of plan. This resulted in overall unit margin improvement thus far in 2010 versus the same period in 2009.

As set forth on Slide 10 and as mentioned previously, we achieved our $700 million recovered capital target in April of this year, and we continue to remain on track to meet our corporate guarantee target level for our non-regulated retail business of $500 million by December 31, 2010 as set forth on Slide 10.

With that, I will now turn this (audio interference).

Joseph O’Leary

Thank you, Charlie. I’ll cover our results for the third quarter 2010 and briefly review our annual diluted earnings per share guidance for 2010 and 2011. Beginning with Slide 11, during the third quarter of 2010 in accordance with generally accepted accounting principles, or GAAP, we recognized diluted earnings per share of $0.26 for the quarter ended September 30, 2010, compared with $0.66 for the same quarter in 2009. To arrive at diluted earnings per share adjusted, we removed restructuring charges at Integrys Energy Group in addition to the following items related to Integrys Energy Services: net non-cash gains related to a derivative in inventory accounting activities; the settlement of supply contracts related to divestitures; the impairment losses on property, plant and equipment; and the net loss on dispositions and foreign currency translation gain. Eliminating the impact of these special items, our third quarter 2010 diluted earnings per share adjusted of $0.35 is more than 20% better than the $0.29 we reported in the third quarter of 2009. Additional details by segment on an adjusted earnings or loss basis are provided on Slide 34 and on a diluted earnings per share adjusted basis on Slide 35.

Although I won’t go into the same detail for the year-to-date comparisons, Slide 11 provides the special item details to arrive at diluted earnings per share adjusted for the nine-month period ending September 30, 2010 and 2009 of $2.30 and $2.12 respectively.

On Slide 12, we present the changes in adjusted earnings by segment for the third quarter of 2010 compared with the third quarter of 2009. The related key drivers for each segment during the quarter can be found on Slides 29 through 33 in the Appendix. I will not go through the key drivers here, but I will answer any questions you may have on the key drivers during our question and answer session.

Moving to Slide 13, we have provided an update for you on our capital expenditure plans for all our subsidiaries. On a Company-wide basis, the total capital spending through 2012 is down about $20 million compared with what we indicated prior to this point. The key highlights include a shifting and slight reduction in capital expenditures for Wisconsin Public Service due to the timing of certain environmental projects at our generating stations, and a $16 million reduction in capital expenditures for Integrys Energy Services in 2010 to reflect a shift in timing of some solar projects. The actual investment level will depend on opportunities available in each of those years. The balance of the changes is the result of modest adjustments to what we presented during our second quarter conference call in August, 2010.

These changes have also been reflected in the regulated utility depreciation schedule as set forth on Slide 14, as well as the summary of net growth and regulated utility rate base investments as set forth on Slide 15.

Moving to Slide 16, let me summarize the slight changes in our financing plan for the balance of 2010 and 2011. In 2010, we completed two $50 million tranches, one in August and one in September, for Peoples Gas. These were opportunistic financings to replace existing debt at lower interest rates. For the balance of 2010, we expect to issue up to $250 million of debt at the Integrys Energy Group parent level to repay existing short-term debt, fund a portion of the repayment by Peoples Energy for its unsecured notes maturing in January 2011, and for general corporate purposes including pension contributions.

For 2011, we expect to issue between 100 million and $150 million of long-term debt for Wisconsin Public Service, and $50 million of long-term debt for Peoples Gas. The latter we will use to support the accelerated natural gas main replacement program in Chicago. Our equity financing plan remains as previously mentioned and our reference to 2010 credit rating actions by Standard & Poor’s and Moody’s is repeated for your reference. For specific credit rating details, you can turn to the Appendix on Slide 26.

I would now like to turn our discussion to earnings per share guidance for 2010 and 2011, which begins on Slide 17. As we indicated in our news release of a week ago, our guidance range for 2010 diluted earnings per share adjusted is between $3.00 and $3.17. This is an increase to the lower end of our range from $2.89 as presented on August 5, 2010, while the upper end of the guidance range for 2010 diluted earnings per share adjusted of $3.17 remains unchanged.

Moving to Slide 18, I will walk through the segment changes which are essentially in line with our third quarter 2010 financial results. For the regulated electric utility segment, the per-share increase of $0.11 to $0.15 is primarily attributable to weather with some additional benefit related to our cost management efforts. For the regulated natural gas utility segment, the downward revision is reflective of our third quarter financial performance. The electric transmission investment segment has been revised downward for the same reason. For Integrys Energy Services, we expect modest improvements in earnings contribution from the core operations due to our better than forecasted unit margins and reduced operations and maintenance expenses carrying through to the end of the year.

Finally, our holding company and other segment is down modestly due to higher effective tax rates offsetting reduced interest expenses.

In summary, the improved expectation that the regulated electric segment and for Integrys Energy Services core operations should more than offset the more modest expected earnings decline at the regulated natural gas utility and holding company and other segments. Additional details of our 2010 earnings per share adjusted are provided on Slide 28.

As Charlie mentioned earlier, our guidance range for 2011 diluted earnings per share adjusted remains unchanged from what we presented on August 5, 2010 and remains between $3.24 and $3.57. We have replicated the slide from our second quarter 2010 conference call as Slide 19.

Now I’ll turn the call back over to Charlie Schrock.

Charles Schrock

Thanks, Joe. Before we take your questions, I will conclude by briefly reviewing why Integrys remains well positioned for the future. Please turn to Slide 20.

First, the continued successful execution of our strategy as demonstrated by quarter-over-quarter and year-over-year increases in financial performance on an adjusted basis for our consolidated company. The execution of our business strategy is on track for the regulated utilities and our non-regulated retail energy supply and services subsidiary. Our guidance range for 2010 diluted earnings per share adjusted that we provided in a news release on October 28, 2010 remains between $3.00 and $3.17. Our guidance range for 2011 diluted earnings per share adjusted remains unchanged from what we provided last quarter of between $3.24 and $3.57.

I feel that our ability to meet the financial projections that we shared with you about 18 months ago is noteworthy. The plans we made then remain on track due to the effective use of cost controls, staff reduction and furloughs, and rate cases at our regulated utilities when necessary to meet our financial objectives. Our operational excellence initiatives will help us permanently remove costs from the system.

We have nearly completed our strategy change at Integrys Energy Services and now have a smaller footprint with a focus on a few key areas – retail natural gas marketing, retail electric marketing, and asset generation investments with renewal attributes. We have concentrated our efforts where we have solid capabilities and critical mass to enable cost-effective operations. We have maintained the rate of our quarterly dividend per share and we are confident in our plan to bring our dividend payout ratio more in line with our utility peers over time.

And finally, we continue to expect diluted earnings per share adjusted growth of 4 to 6% on an average annualized basis with 2011 as the base year through 2015.

We will now open up the call for questions.

Question and Answer Session

Operator

Thank you. At this time if you would have a question, please depress star, one. You will be prompted to record your name. Should you wish to withdraw your question, depress star, two. Again, star, one if you have a question please. One moment for the first question.

Our first question today comes from Paul Patterson. Your line is open, and please state your company name.

Paul Patterson – Glenrock Associates

Paul Patterson of Glenrock Associates. How are you guys?

Charles Schrock

Good morning, Paul. We’re doing well. How are you?

Paul Patterson – Glenrock Associates

All right. I wanted to sort of go over Slide 30. I’m a little—I just want to make sure I understand this. The weather impact versus normal, could you give us a feeling for what that was?

Charles Schrock

Okay Paul, you’re talking about the slide on 30 that shows the different contributions to the electric segment, right?

Paul Patterson – Glenrock Associates

Right. There seems to be, like, a 15% increase in residential volume, and it sounds like weather was part of that. I mean, just sort of weather versus normal, how should we think of that?

Charles Schrock

Well that’s exactly right. The weather in Wisconsin and the upper peninsula of Michigan was significantly warmer than in past years, certainly than in 2009. It was about the warmest that we’ve seen in about 10 years, so our sales, especially in the residential area, were up because of that warmer than normal weather, which contributed to those margins.

Paul Patterson – Glenrock Associates

Okay, so basically that’s mostly sort of above normal as opposed to just—I mean, obviously that’s the delta between quarter-over-quarter, but would you say—basically was last year pretty normal, I guess is my question?

Charles Schrock

Actually I think 2009 was down a little bit, and 2010 was probably above normal a bit so you had a bigger range there.

Paul Patterson – Glenrock Associates

Okay. With respect to the fuel and purchase power, how much of that was—where was that? What utility was that?

Charles Schrock

That’s primarily the Wisconsin Public Service utility.

Paul Patterson – Glenrock Associates

And does that get refunded or is there any review of that? I know that you guys did some refunds, I think, for ’08 and ’09.

Charles Schrock

Well generally speaking, we have a—it’s called a double trigger on our fuel window. But as we project our year-end average fuel costs, if those are different than what’s in the rate case, then we either collect more back from customers or return more to customers. Given where we are in the fuel window and because of the prospective nature, there’s a contribution that’s good both for customers and for shareholders. So that’s the piece—if you look on that same Slide 30, it shows—it’s item—excuse me just a second. It’s Item B—or excuse me, Item A on that little green block, Item A. That’s what that one is.

Paul Patterson – Glenrock Associates

Is that mostly—so that was mostly this fuel benefit that you guys had, I guess. How should we think of the—I guess, how normal is that, I guess; or is there potential for any of that to be refunded, I guess?

Charles Schrock

I guess as we look forward, we don’t assume those sorts of variations in our projections. So if you want to think about it, it is a little bit different than what the base assumptions would be that are built into our projections.

Paul Patterson – Glenrock Associates

Okay. What was the ROE that you guys—what’s the last 12 months ROE that you’re earning in Wisconsin?

Charles Schrock

Paul, I don’t have that number at hand. Let me—we’ll have to check on that one. I don’t think we have a rolling 12 month like that, that we keep track of.

Paul Patterson – Glenrock Associates

Okay. And then I guess with O&M, what’s the story there? I mean, it seems like a pretty large increase that you guys have had, and give us a sort of flavor for how that looks going forward. I mean, you guys were talking about some cost cutting and what have you, and it seems like it’s gone up a lot in the quarter.

Charles Schrock

There’s a couple of different things that play into O&M on a quarter-over-quarter basis, so on the one hand while we have been pretty effective with controlling our labor costs and some other costs, yet at the same time could have maintenance changes, for example, on the power plants and things like that, that create a quarter-over-quarter variation. So those kinds of things as well as pensions and benefits and stuff like that, drives the O&M differences.

Paul Patterson – Glenrock Associates

Is there any—how normalized is this, I guess is what I’m wondering. How should we think about O&M going forward?

Charles Schrock

In a general way, Paul, we forecast or project our O&M as best we can, but from an earnings standpoint we also have rate cases. So for example, Wisconsin Public Service is in a rate case this year, so that helps us kind of chew up the O&M with the revenue requirements.

Paul Patterson – Glenrock Associates

Okay. And then just finally, this pricing strategy that you guys are doing in energy services, could you just remind us exactly what that change is and just what you’re seeing in terms of the competitive environment in that business?

Charles Schrock

Sure. I’m going to ask Mark Radtke to comment on that.

Mark Radtke

Sure. Morning, Paul. Thanks very much for the question. When we talk about pricing strategy, what we’re really talking about is given the way cost of capital has changed in the industry, the collateral that’s required to support this business, we are now projecting—for every transaction that we enter into, we project the potential collateral requirements under various market stress moves. You know, we’ve talked always in the past about how we hedge the requirements to fulfill our customer contracts at the time of making those commitments to our customers. And so we price in the maximum potential collateral that could be required to support that contract over the life, and then so that’s flowing through the margin line. That’s one of the reasons why you’re seeing larger margins in this business when you’re looking at quarter-over-quarter or year-over-year comparisons.

Paul Patterson – Glenrock Associates

So how does that—I mean, so are you actually changing—so you’re changing the price that your customers are actually receiving, and how is that being dealt with vis-à-vis your competition, I guess?

Mark Radtke

Yeah, it’s actually—we don’t actually change the price of existing commitments, and that’s why you’re seeing a gradual rise in realized margins because our business in this past quarter, for instance, is a combination of contracts that were put on the books in that old pricing environment blended with an increasing number of contracts that have been put on in this newer pricing environment. So that’s why we’re projecting a continued ramp-up of the realized margins and we see our contracting activity reflecting those higher margins, so that’s what gives us the confidence in standing behind those higher margin projections. We are seeing everyone in the industry do that. We didn’t see it initially. We put this approach in place back in 2009, even before we had decided the ultimate fate for this Company, and initially we didn’t see competitors do that and that really slowed down our contracting activity. Over the several months after we began that pricing strategy, we began to see competitors do things very, very similar, and so the pricing strategy that we use today, we do that as an at-market pricing strategy.

Paul Patterson – Glenrock Associates

And how does that compare to the prices that you were charging before?

Mark Radtke

You can see that per unit margins compared to historical levels are up significantly, 50 to 80% on a unit margin basis. I mean, the margins have historically been fairly slim in this business; and under the revised competitive environment, we’re seeing margins now in the $6.00-plus range.

Paul Patterson – Glenrock Associates

So I guess this is what I’m sort of trying to figure out here, is—so in general the industry, I guess you guys are sort of leading it, to a certain degree, I guess. But the industry now is charging more for the services that it was providing. If I understand you correctly, is there any specific thing that you felt triggered that, or what made them sort of wake up and get religion, so to speak?

Mark Radtke

Yeah, I really think it was the events in third quarter of 2008. You know, prior to that, credit facilities—and credit facilities are a critical resource to a company like ours. We need to have bank facilities standing behind us to be able to provide collateral assurance for the commitments that we make in the marketplace. And prior to Q3 2008, credit facilities were—I mean, they were very, very low cost – practically free. And so consequently you didn’t have much of a quote-unquote capital charge priced into products that were offered in the marketplace. Q3 2008, I think, was the event that caused the industry to get religion, as you say.

Paul Patterson – Glenrock Associates

Okay. And so going forward, you guys see this sort of hanging in there and getting better, I guess. Is that right?

Mark Radtke

Yeah, we believe that it will—that these margin levels will be sustainable, and you’ll see that roll through our realized margin levels on a quarterly basis through 2011 as those older previously priced deals roll off the books.

Paul Patterson – Glenrock Associates

Okay. Well, I’ll let other people ask questions. Thanks a lot, guys.

Operator

Our next question comes from Ali Agha. Your line is open, and please state your company name.

Ali Agha – SunTrust Robinson Humphrey

Thank you. Good morning. SunTrust Robinson Humphrey.

Charles Schrock

Morning, Ali. Thanks for joining us today.

Ali Agha – SunTrust Robinson Humphrey

Thanks, Charlie. A couple of questions – one, I was curious, given all the rate increases that you got on your gas utility side earlier this year, why was gas utility results third quarter down from third quarter last year?

Joseph O’Leary

Ali, let me pull out a little bit, but I think it relates really to expense—on the expense side. What we saw was some bad debt expense in the processes that we used to track the bad debt that came up in the third quarter here.

Ali Agha – SunTrust Robinson Humphrey

Okay. And what’s the implication looking forward of that?

Charles Schrock

Yeah, I’m going to have Jim Schott kind of get into a little more of the detail around that for you.

James Schott

Morning, Ali. It’s Jim Schott. Thanks for the question. The ’09—in 2009 in the third quarter, SB 1918 in Illinois took effect and that was to allow deferral accounting for bad debt expense, and we had a one-time benefit in ’09 of—I believe it was about $5 million, and that was a non-recurring item in 2009 that did not recur in 2010. So going forward in Illinois, we have a bad debt rider so we’ll get automatic deferral for bad debt expense.

Ali Agha – SunTrust Robinson Humphrey

Okay, so that 5 million benefit last year is included in your adjusted net income for last year?

James Schott

Yes. That is correct.

Ali Agha – SunTrust Robinson Humphrey

Okay. And then on energy services, also can you remind us – is there a seasonality issue here? Why is the third quarter a slight loss for them, given that they have been solidly profitable through the first two quarters of this year?

Charles Schrock

Ali, I’ll have Mark address that one.

Mark Radtke

Thanks, Ali. There is a little seasonality in the business. Electric tends to be a little bit stronger in the summer months. Gas tends to be stronger in the winter months. So being a combination company, we don’t really view our business as particularly seasons. The effects in this quarter—we’re still funding some operating expense associated with transitioning of the business, and there are also some margin impacts associated with, like, our wholesale business, business that is transitioning off the books but we’ve just got contracts that go to settlement. All of that contributed to, at least in the core category, a reported loss. It was recognized there is more in the core category than will be in the business going forward. Core includes the entire marketing business, all of the people expenses associated with the transition activities as well. So it’s not quite as clear a picture in Q3 as we might like; and as we project forward into 2011, as Charlie mentioned, those transition activities are wrapping up here.

Ali Agha – SunTrust Robinson Humphrey

Right. But Mark, just to be clear on that, you reported a 5 million net income in the second quarter of this year, so sequentially you went from plus-5 to negative-0.5 So even if you look at it sequentially, and you mentioned there’s not that big of a seasonality issue, so what caused that roughly 5, $6 million swing this quarter from the second quarter?

Mark Radtke

Yeah, I don’t have a second quarter to third quarter walk for you, Ali.

Ali Agha – SunTrust Robinson Humphrey

Okay. I may take that offline with Steve, then.

Mark Radtke

Yeah. The reality is, is that we’re working with relatively small numbers, around zero, and margins as contracts settle can vary. I mean, that’s not a huge margin—you know, total margin move number from one quarter to the next. It doesn’t necessarily reflect—you know, just purely comparable business being delivered from one quarter to the next.

Ali Agha – SunTrust Robinson Humphrey

Okay.

Mark Radtke

But we’ll look back at second quarter info and third quarter info and see if we can help you with a walk from one quarter to the next.

Ali Agha – SunTrust Robinson Humphrey

Okay. And then ’11 guidance, as I recall, my sense is you folks assume normal weather when you put your forward guidance out there. There’s not that much happening in terms of rate case relief in ’11. Of course, the W, yes, a decision will come in but that would be it. So the swing factors in ’11, assuming normalized weather and not much happening on rate cases, where would those come in? Are those really energy service assumptions, or what would cause such a big range for the ’11 guidance that you put out there?

Charles Schrock

Ali, I think generally speaking that’s about right. We do expect a little bit of improvement on the utility side but Integrys Energy Services, as it works through the transitional year this year, should pick up a bit next year.

Ali Agha – SunTrust Robinson Humphrey

Okay. And last question, Charlie, now that elections are behind us, really focusing in on Illinois. Anything—as you look at the aftermath, anything that has changed in your thinking vis-à-vis the regulatory environment in Illinois that would influence your Peoples Gas rate case filing? And when should we expect to see Peoples Gas going back in for the next rate case?

Charles Schrock

Well Ali, as we’ve mentioned before, we’re looking at the numbers. We have not made a final decision on the rate case yet, but we will be prepared to submit one early next year if that’s what we decide to do. As far as the elections themselves go, I don’t really expect to see an immediate change in how things operate. We will continue to operate the way we always have with putting together solid packages and working in an open and transparent way with the Commission. So that’s kind of where we’re at, and we’ll just keep you posted as things go forward.

Jim, do you have anything to add?

James Schott

Yeah. Ali, right now no one’s called the Illinois race right now, but Quinn is up by 19,000 so—and the Democrats held both the Assembly and the Senate, unlike a lot of other states. So yeah, to echo Charlie, we’re not expecting significant changes at the Commission.

Ali Agha – SunTrust Robinson Humphrey

Understood. Thank you.

Charles Schrock

Thanks, Ali. Thanks for joining us.

Operator

Our next question today comes from Chris Shelton. Your line is open, and please state your company name, sir.

Chris Shelton – Millennium Partners

Good morning. It’s Chris Shelton from Millennium Partners. Good morning, guys.

Charles Schrock

Good morning, Chris.

Chris Shelton – Millennium Partners

Just a couple of follow-ups – I guess you were talking about the weather affect on the quarter before, and was it really mostly UPPCO because—or was there also Wisconsin Public Service?

Charles Schrock

Chris, it was both actually, and I think Wisconsin Public Service is the bigger of the two companies so it tends to contribute a little bit more.

Chris Shelton – Millennium Partners

Was there—did you guys have a decoupling mechanism at Wisconsin Public Service at one point, and—

Charles Schrock

Chris, yes we do; and I know that creates a little confusion. The decoupling on the electric side has a $14 million band around it, or a limit, if you will. And what had happened is we had actually exceed that band so the warmer weather helped us crawl back closer, if you will, back into that range.

Chris Shelton – Millennium Partners

Okay, so above the 14 million was still a benefit to you, I guess.

Charles Schrock

That’s correct.

Chris Shelton – Millennium Partners

Okay. That’s helpful. And did you quantify the weather effect, I guess, on the quarter?

Charles Schrock

I think it’s on that Slide 30—

Chris Shelton – Millennium Partners

I may have missed it.

Charles Schrock

Hold on just a second, Chris. We’re going to pull that slide out.

Joseph O’Leary

If you go to Slide 30—this is Joe.

Chris Shelton – Millennium Partners

Hey, Joe.

Joseph O’Leary

We’ve got the increase in sales volume to residential customers, and that’s driven primarily by the weather.

Chris Shelton – Millennium Partners

Okay. Okay, thank you. And then the—I guess, Mark, on the—you used to give the slide of your 2011 assumptions on volume, and also the margin. It sounds like the margins have come up some. I think—have the volume assumptions changed, or has that slide been updated?

Mark Radtke

We haven’t updated the slide. Certainly we’re feeling like the volume projection that we put out there back in February is stronger than what it’s likely to be in 2011 actuals. We’ve actually chosen to not update that slide because we’re not particularly focused on volume in and of itself. We’re focused on the bottom line performance of the business, and that’s a combination of volumes, unit margins, and operating expense. And given what we’re seeing in terms of contracted activity and what we outlined in terms of the 2011 contracted volume on the slide in the deck today, and the unit margins associated with that, we’re comfortable with the guidance range that we’ve talked about previously and have included here today.

That said, you know, ballpark numbers, we’re anticipating probably that volume number will be maybe 3 million megawatt hours or so less than what we had talked about in February at the analyst presentation; and I’m speaking of electric volumes. I assume that was your question as well.

Chris Shelton – Millennium Partners

Yeah. And then also, I guess, on the gas side, what—well, first of all, the $6.00 margin you were talking about before was on electric also, I assume?

Mark Radtke

Right.

Chris Shelton – Millennium Partners

And then on the gas side, how is that margin and those volumes changed since the February projection, I guess?

Mark Radtke

Yeah, the gas business is actually tracking pretty much in line with what we had talked about. There, we don’t see the volume erosion. Margins are solid but they’re not outpacing what we had projected earlier in the year at the same rate that electric margins are. So we’re essentially happy with the gas business coming together as we had projected in the categories that we had projected. Electric, the bottom line is coming together; it’s just coming together in a little different form than we had projected.

Chris Shelton – Millennium Partners

Got it. And is there—what’s the reason—I guess it’s good that the margins are expanding, obviously. Is there any reason you’re having problems booking more volumes? Is there more competition in the market or--?

Mark Radtke

Well, one of the reasons is that we’re not chasing the lower margin business. We’re focusing on customers that appreciate the value proposition that we deliver and the pricing associated with the product suite that we offer. We also have not been participating in some of the auctions that are out there to acquire large groups of customers via an auction mechanism. I mean, these are direct sales to customers.

Chris Shelton – Millennium Partners

Okay. All right. That’ll do. Thanks very much, guys. I appreciate it.

Charles Schrock

Thank you, Chris.

Operator

Our next question comes from Faisal Khan. Your line is open, and please state your company name.

Faisal Khan – Citigroup

Yeah, good morning. Thank you for all the detailed financial information. I had a question on how you guys are thinking about M&A, specifically in the gas utility and maybe even on the electric side of the equation. Are you guys—would you ever consider a corporate transaction or continuing to expand your footprint on the gas utility side?

Charles Schrock

Faisal, thanks for the question. Just as a matter of policy, we don’t comment on M&A, so I would just add that it has to add shareholder value, but we just leave it at that.

Faisal Khan – Citigroup

Okay. Do you think that there needs to be consolidation in the gas utility sector at all? I mean, what’s your philosophy on that?

Charles Schrock

Again, we don’t comment specifically on M&A activity. If you look around the industry, consolidation is occurring but that’s just a fact.

Faisal Khan – Citigroup

Okay. Thank you.

Operator

Before our question from Ashar Khan, I’d like to remind parties – star, one if you have a question, please. Our next question does come from Mr. Khan. Your line is open and please state your company name.

Ashar Khan – Visium Asset Management

Hi. Visium Asset Management. Good morning. Just wanted to go back to that question on volume. So if I’m right, you’re saying now on the electric side for 2011, you’re expecting 16 instead of the 19? Is that what I heard?

Charles Schrock

Ashar, I think you’re talking about Integrys Energy Services, right?

Ashar Khan – Visium Asset Management

That’s correct. That’s correct. Going back to the February 17, you gave us a volume and margin slide for 2011. I’m just—if I’m right, what I’ve heard is that you’re expecting for ’11 three less than the 19 that was on the slide. Is that what I heard?

Charles Schrock

I’ll have Mark explain that.

Mark Radtke

Sure. You’re correct. We’re definitely expecting that we’ll come in below the 19 number. I wanted to provide a sense for that but I’m not providing a specific number because I don’t want the organization to be focused on achieving a particular volume number.

Steven Eschbach

Ashar, could you put your phone on mute for a moment? We’re getting a lot of background noise.

Mark Radtke

There we go.

Steven Eschbach

Thank you.

Mark Radtke

There is—as I was saying, we’re expecting the volume number to be down from what we had talked about in February. I wanted to provide that 3 million megawatt hours as a ballpark reduction, but not providing a specific number per se because it’s—we’re just not focused on a volume number. I think that when organizations put volume targets out there, you know, you can go get volume. That’s not what this volume is about. This business is about going and getting quality business that meets our needs in terms of the cost required to run this business, and meets customer needs in terms of delivering the value that they need from their energy supplier. And we’re comfortable with the results that—the bottom line contribution that we included in our 2011 guidance, and that will be on a smaller volume than we had originally projected. Frankly, I view that as a good thing. Any time you can deliver the same results in a business on less volume, you’ve got less transactions risks, you’ve got lower capital costs associated with supporting that business; and so we’re pleased with what we see for the business heading into 2011.

Operator

And we have no further questions, so I’ll turn the call back over to Mr. Eschbach for closing remarks.

Steven Eschbach

Thank you; and thank you very much for being a part of our third quarter earnings conference call. A replay of this call will be available until February 22, 2011 by dialing toll-free 866-456-9373. I repeat, 866-456-9373. Today’s presentation is available on our website at www.integrysgroup.com – that is the text for today’s presentation. Just select Investor and then Presentations. If you have any additional questions, you may contact me directly at 312-228-5408 or Donna Sheedy at 920-433-1857. Thank you.

Operator

Thank you for participating in today’s call. This conference has now ended. You may disconnect at this time.

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